“Standard” term sheets are only 38% founder-friendly

Side-by-side comparison of Founder Friendly Standard with popular term sheet templates.

Y Combinator Safe, 500 Startups KISS, and other “standard” term sheets cannot claim they are founder-friendly, reveals study by 6 startup attorneys.

Nearly every hour of my spare time since May 2019 has gone into this research study to determine if “standard” term sheets really are founder-friendly. It feels amazing to be finished! Here is what we found.

Six attorneys analyzed 298 pages of legalese from:

  1. Y Combinator Safes
  2. 500 Startups KISS notes
  3. NVCA Model Legal Docs
  4. Gust Series Seed term sheet
  5. Sam Altman ‘Founder-Friendly’ term sheet
  6. Y Combinator Series A term sheet

Compared to Founder Friendly Standard®, a framework for determining if a venture capital or angel investment deal is founder-friendly, the above “standard” term sheets and contract templates were on average:

  • A little more than a third (38%) founder-friendly as defined by being compatible with Founder Friendly Standard.
  • Just under a third (32%) founder-unfriendly as defined by being incompatible with Founder Friendly Standard.
  • Nearly a third (30%) silent on the issues in Founder Friendly Standard.
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Why founders should get super-voting equity

Founder Friendly Standard gives founders 24:1 super-voting equity. Here is the rationale behind it.

This weekend, I’ve been reaching out to startup influencers to coordinate a twitter campaign where we celebrate Indie Hackers, bootstrappers, customer-funding, and Zebras during the unicorn-obsessed Tech Crunch Disrupt conference in San Francisco, October 2 – 4, 2019. If you want to join us, we’re using the hashtag #DisruptVC.

One of the influencers I approached asked why Founder Friendly Standard gives founders a 24:1 voting advantage. The reason is to keep founders in control of their companies. Here’s an excerpt from the email:

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Are there any standard contract templates for investors and founders to use when funding startups?

Here’s me at Enchanted Rock meditating on a better way to beat the odds at the startup lottery.
Here’s me at Enchanted Rock meditating on a better way to beat the odds at the startup ‘lottery.’

Yes. There are lots of templates available, and you should start by retaining an attorney who represents founders. Your attorney may have a set of templates that you can have adapted to the Founder Friendly Standard.

After learning hard lessons about the tension between investors and founders, I teamed up with my former business partner, Dan Flanegan, and my former attorney, K. Adam Bloom, to create an open-source standard that you can attach to any bylaw agreement, term sheet, employment agreement, etc.

It’s called the Founder Friendly Standard. It has 17 sections that can lay common disputes to rest such as who gets to vote, who gets liquidation preferences, what is the scope of non-compete, etc.

Here are (3) three of the juiciest sections:

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17 tweets from Grays Sports Almanac for Venture Capital

#StartupGrind 2019 was a coming out party for many of the ideas behind my investment hypothesis, Grays Sports Almanac for Venture Capital

Here are the top 17 tweets that illustrate points made in the book:

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Manage 10 of the 20 top startup failure risks.

Founder Friendly Standard and customer-funding can help founders avoid “No market need, Running out of cash, Not the right team,” and 7 more reasons startups fail. 

Source: Top 20 reasons startups fail is from CB Insights. I added the check marks.

The above graph shows the top 20 reasons why startups fail from CB Insights. I marked up the graph with green checkboxes to show which risk factors customer-funding (also called bootstrapping) can help you manage. Orange checkboxes denote risk factors that Founder Friendly Standard can help manage. 

Risk Factor: No market need

If you’re bootstrapping, you’ll find out pretty quickly if there is no market need. Unlike your angel and VC-funded cohorts, you’ll be able to make fast pivots while they’re lining up their organizations’ change management strategies.

Risk Factor: Ran out of cash

If you are bootstrapping, you are financing innovation with organic cash flows. This is a key growth driver in the Credit Suisse Family 1000 research. If your company is controlled by its founders, you’re more likely to pace yourself, spending the money like it’s your own vs. your VC-funded competitors who are quick to spend (principal–agent theory).

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Update: Founder Friendly Standard v1.1

Pictures of Founder Friendly Standard Authors

Pictures of Founder Friendly Standard Authors
Founder Friendly Standard Authors: Dan Flanegan, Eisaiah Engel, Adam Bloom

Founder Friendly Standard v1.0 has been updated today. The new version of the standard is 1.1. Here is a description of the change:

  • Section 2.4 – clarifying language (in bold) has been added for companies outside of the United States. The section now reads: Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.

The change has been applied to:

Grays Sports Almanac for Venture Capital

Grays Sports Almanac for Venture Capital - A new standard for optionality to beat the odds

Grays Sports Almanac for Venture Capital - A new standard for optionality to beat the odds
Grays Sports Almanac for Venture Capital on Amazon, Audible, and iTunes.

Executive Summary

Grays Sports Almanac for Venture Capital proposes a new risk management strategy for venture capital. In this investment hypothesis, I outline why a venture fund might beat the odds by purchasing 2,208 to 4,416 warrants on startups. Startups would operate under a governance framework called the Founder Friendly Standard, which gives entrepreneurs control of their companies. In exchange, the venture fund would have the option to exercise warrants for 15 years—purchasing discounted equity only in the startups that become successful.


This text appears in the introduction to Grays Sports Almanac for Venture Capital, available on Amazon, Audible, and iTunes.